Worried About The Greek Crisis? Here's What You Need To Know
If you're like most investors, you've kept an eye on events in debt-plagued Greece. The latest news isn't good. Million of Greek voters shot down a last-chance bailout deal. A possible exit from the Eurozone looms. The effects on world markets? Uncertain, but potentially problematic.
The media has done a terrific job into whipping investors into a frenzy. Yet what do you really need to know? How will the developments in Greece affect the typical U.S. investor?
Will the Greek crisis spread overseas?
If you're a typical small investor, you shouldn't worry too much. U.S. stocks took a hit when Greece recently failed to make a large debt payment to the IMF. That drop was the largest of 2015. So it's natural to worry that bigger drops loom, as the Greek crisis intensifies. It's possible -- likely even -- your 401k performance may be erratic in the weeks ahead.
Yet long-term, the impact should be fairly minor. Greece is not an economic powerhouse like Germany. It's a small country with a relatively tiny global economic footprint.
Furthermore, Greece has been mired in crisis for years. Investors have had fair warning about debt defaults and a potential Euro exit. And most private investors have reacted accordingly.
Foreign investment in Greek banks has been cut dramatically. Exposure is limited and the risks are not concentrated in the hands of any single entity. For that reason, the likelihood of a panic in global markets is lessened.
How should I react?
Some may be tempted to pull money out of the market. After all, why take a chance? Yet history shows that this is generally an unwise course of action. Some short-term turbulence is all but inevitable. Yet the local debt crisis of a minor economic player in Europe shouldn't be cause to alter your long-term wealth creation strategy. Trouble in Greece could actually offer a few benefits. For example, investors may flock to safe and dependable assets such as U.S. Treasuries. Bond funds should then prosper.
If you have a diversified portfolio, your risk should be minimal. Most mutual funds hold a minority position in foreign stocks. And Greek companies comprise a tiny minority of that minority.
The economic outlook for Greek citizens is resoundingly grim. Yet the aftershocks in domestic markets should be fairly muted.
Media alarmism may generate page views and TV ratings. It shouldn't, however, cause you to deviate from historically proven wealth building strategies.